Republic of the Philippines imposes the tax.
But debts owing by corporations are obligations of the debtors, and
SUPREME COURT
Manila
EN BANC
G.R. No. L-42780 January 17, 1936
MANILA GAS CORPORATION, plaintiff-appellant,
vs.
THE COLLECTOR OF INTERNAL REVENUE, defendant-appellee.
1.CONSTITUTIONAL LAW; CONSTITUTIONALITY OF STATUTE; TlME
OF RAISING QUESTION.—Where neither in the pleadings, the decision of the trial
court, nor the assignment of errors, was the question of the validity of an act raised,
and no jurisdictional issue being involved, it is not the duty of the Supreme Court to
pass on the constitutional question.
2.ID.; ID.; ID. ; ACT No. 3761, VALIDITY.—Quære as to whether or not Act No.
3761 is valid.
3.ID.; TAXATION; OBLIGATION OF CONTRACTS.—A corporation has a
personality distinct from that of its stockholders, enabling the taxing power to reach
the latter when they receive dividends from the corporation. Dividends of a domestic
corporation which are paid and delivered in cash to foreign corporations as
stockholders are subject to the payment of the income tax, the exemption clause in the
charter of the corporation notwithstanding. (Philippine Telephone and Telegraph Co.
vs. Collector of Internal Revenue [1933], 58 Phil., 639.)
4.ID.; ID.; DUE PROCESS OF LAW; SITUS.—No state may tax anything not
within its jurisdiction without violating the due process clause of the constitution. The
taxing power of a state does not extend beyond its territorial limits, but within such
limits it may tax persons, property, income, or business.
6.ID. ; ID. ; ID. ; ID. ;—If an interest in property is taxed, the situs of either the
property or interest must be found within the state. If an income is taxed, the recipient
thereof must have a domicile within the state or the property or business out of which
the income issues must be situated within the state so that the income may be said to
have a situs therein.
6.ID.; ID.; ID.; ID.—Personal property may be separated from its owner, and he may
be taxed on its account at the place where the property is although it is not the place of
his own domicile and even though he is not a citizen or resident of the state which
only possess value in the hands of the creditors.
7.ID.; ID.; ID.; ID.; CASE AT BAR.—Held: That the Collector of Internal Revenue
was justified in withholding income taxes on dividends and interest on bonds and other
indebtedness paid by a resident Corporation to non-resident corporations. Manila Gas
Corporation vs. Collector of Internal Revenue, 62 Phil. 895, No. 42780 January 17,
1936
MALCOLM, J.:
This is an action brought by the Manila Gas Corporation against the Collector of
Internal Revenue for the recovery of P56,757.37, which the plaintiff was required by
the defendant to deduct and withhold from the various sums paid it to foreign
corporations as dividends and interest on bonds and other indebtedness and which the
plaintiff paid under protest. On the trial court dismissing the complaint, with costs, the
plaintiff appealed assigning as the principal errors alleged to have been committed the
following:
1. The trial court erred in holding that the dividends paid by the plaintiff
corporation were subject to income tax in the hands of its stockholders,
because to impose the tax thereon would be to impose a tax on the plaintiff,
in violation of the terms of its franchise, and would, moreover, be oppressive
and inequitable.
2. The trial court erred in not holding that the interest on bonds and other
indebtedness of the plaintiff corporation, paid by it outside of the Philippine
Islands to corporations not residing therein, were not, on the part of the
recipients thereof, income from Philippine sources, and hence not subject to
Philippine income tax.
The facts, as stated by the appellant and as accepted by the appellee, may be
summarized as follows: The plaintiff is a corporation organized under the laws of the
Philippine Islands. It operates a gas plant in the City of Manila and furnishes gas
service to the people of the metropolis and surrounding municipalities by virtue of a
franchise granted to it by the Philippine Government. Associated with the plaintiff are
the Islands Gas and Electric Company domiciled in New York, United States, and the
General Finance Company domiciled in Zurich, Switzerland. Neither of these last
mentioned corporations is resident in the Philippines.
For the years 1930, 1931, and 1932, dividends in the sum of P1,348,847.50 were paid
by the plaintiff to the Islands Gas and Electric Company in the capacity of stockholders
upon which withholding income taxes were paid to the defendant totalling P40,460.03
For the same years interest on bonds in the sum of P411,600 was paid by the plaintiff
to the Islands Gas and Electric Company upon which withholding income taxes were
paid to the defendant totalling P12,348. Finally for the stated time period, interest on
other indebtedness in the sum of P131,644,90 was paid by the plaintiff to the Islands
Gas and Electric Company and the General Finance Company respectively upon which
withholding income taxes were paid to the defendant totalling P3,949.34.
Some uncertainty existing regarding the place of payment, we will not go into this
factor of the case at this point, except to remark that the bonds and other tokens of
indebtedness are not to be found in the record. However, Exhibits E, F, and G, certified
correct by the Treasurer of the Manila Gas Corporation, purport to prove that the place
of payment was the United States and Switzerland.
The appeal naturally divides into two subjects, one covered by the first assigned error,
and the other by the second assigned error. We shall discuss these subjects and errors
in order.
1. Appellant first contends that the dividends paid by it to its stockholders,
the Islands Gas and Electric Company , were not subject to tax because to
impose a tax thereon would be to do so on the plaintiff corporation, in
violation of the terms of its franchise and would, moreover, be oppressive and
inequitable. This argument is predicated on the constitutional provision that
no law impairing the obligation of contracts shall be enacted. The particular
portion of the franchise which is invoked provides:
The grantee shall annually on the fifth day of January of each year
pay to the City of Manila and the municipalities in the Province of
Rizal in which gas is sold, two and one half per centum of the gross
receipts within said city and municipalities, respectively, during the
preceding year. Said payment shall be in lieu of all taxes, Insular,
provincial and municipal, except taxes on the real estate, buildings,
plant, machinery, and other personal property belonging to the
grantee.
The trial judge was of the opinion that the instant case was governed by our
previous decision in the case of Philippine Telephone and Telegraph Co., vs.
Collector of Internal Revenue ([1933], 58 Phil. 639). In this view we concur.
It is true that the tax exemption provision relating to the Manila Gas
Corporation hereinbefore quoted differs in phraseology from the tax
exemption provision to be found in the franchise of the Telephone and
Telegraph Company, but the ratio decidendi of the two cases is substantially
the same. As there held and as now confirmed, a corporation has a personality
distinct from that of its stockholders, enabling the taxing power to reach the
latter when they receive dividends from the corporation. It must be
considered as settled in this jurisdiction that dividends of a domestic
corporation, which are paid and delivered in cash to foreign corporations as
stockholders, are subject to the payment in the income tax, the exemption
clause in the charter of the corporation notwithstanding.
For the foreign reasons, we are led to sustain the decision of the trial court
and to overrule appellant's first assigned error.
2. In support of its second assignment of error, appellant contends that, as the
Islands Gas and Electric Company and the General Finance Company are
domiciled in the United States and Switzerland respectively, and as the
interest on the bonds and other indebtedness earned by said corporations has
been paid in their respective domiciles, this is not income from Philippine
sources within the meaning of the Philippine Income Tax Law. Citing
sections 10 (a) and 13 (e) of Act No. 2833, the Income Tax Law, appellant
asserts that their applicability has been squarely determined by decisions of
this court in the cases of Manila Railroad Co. vs. Collector of Internal
Revenue (No. 31196, promulgated December 2, 1929, nor reported),
and Philippine Railway Co. vs. Posadas (No. 38766, promulgated October
30, 1933 [58 Phil., 968]) wherein it was held that interest paid to non-resident
individuals or corporations is not income from Philippine sources, and hence
not subject to the Philippine Income Tax. The Solicitor-General answers with
the observation that the cited decisions interpreted the Income Tax Law
before it was amended by Act No. 3761 to cover the interest on bonds and
other obligations or securities paid "within or without the Philippine Islands."
Appellant rebuts this argument by "assuming, for the sake of the argument,
that by the amendment introduced to section 13 of Act No. 2833 by Act No.
3761 the Legislature intended the interest from Philippine sources and so is
subject to tax," but with the necessary sequel that the amendatory statute is
invalid and unconstitutional as being the power of the Legislature to enact.
Taking first under observation that last point, it is to be observed that neither in the
pleadings, the decision of the trial court, nor the assignment of errors, was the question
of the validity of Act No. 3761 raised. Under such circumstances, and no jurisdictional
issue being involved, we do not feel that it is the duty of the court to pass on the
constitutional question, and accordingly will refrain from doing so. (Cadwaller-Gibson
Lumber Co. vs. Del Rosario [1913], 26 Phil., 192; Macondray and Co. vs. Benito and
Ocampo, P. 137, ante; State vs. Burke [1912], 175 Ala., 561.)
As to the applicability of the local cases cited and of the Porto Rican case of
Domenech vs. United Porto Rican Sugar co. ([1932], 62 F. [2d], 552), we need only
observe that these cases announced good law, but that each he must be decided on its
particular facts. In other words, in the opinion of the majority of the court, the facts at
bar and the facts in those cases can be clearly differentiated. Also, in the case at bar
there is some uncertainty concerning the place of payment, which under one view
could be considered the Philippines and under another view the United States and
Switzerland, but which cannot be definitely determined without the necessary
documentary evidence before, us.
The approved doctrine is that no state may tax anything not within its jurisdiction
without violating the due process clause of the constitution. The taxing power of a
state does not extend beyond its territorial limits, but within such it may tax persons,
property, income, or business. If an interest in property is taxed, the situs of either the
property or interest must be found within the state. If an income is taxed, the recipient
thereof must have a domicile within the state or the property or business out of which
the income issues must be situated within the state so that the income may be said to
have a situs therein. Personal property may be separated from its owner, and he may
be taxed on its account at the place where the property is although it is not the place of
his own domicile and even though he is not a citizen or resident of the state which
imposes the tax. But debts owing by corporations are obligations of the debtors, and
only possess value in the hands of the creditors. (Farmers Loan Co. vs. Minnesota
[1930], 280 U.S., 204; Union Refrigerator Transit Co. vs. Kentucky [1905], 199 U.S.,
194 State Tax on Foreign held Bonds [1873, 15 Wall., 300; Bick vs. Beach [1907],
206 U. S., 392; State ex rel. Manitowoc Gas Co. vs. Wig. Tax Comm. [1915], 161
Wis., 111; United States Revenue Act of 1932, sec. 143.)
These views concerning situs for taxation purposes apply as well to an organized,
unincorporated territory or to a Commonwealth having the status of the Philippines.
Pushing to one side that portion of Act No. 3761 which permits taxation of interest on
bonds and other indebtedness paid without the Philippine Islands, the question is if the
income was derived from sources within the Philippine Islands.
In the judgment of the majority of the court, the question should be answered in the
affirmative. The Manila Gas Corporation operates its business entirely within the
Philippines. Its earnings, therefore come from local sources. The place of material
delivery of the interest to the foreign corporations paid out of the revenue of the
domestic corporation is of no particular moment. The place of payment even if
conceded to be outside of tho country cannot alter the fact that the income was derived
from the Philippines. The word "source" conveys only one idea, that of origin, and the
origin of the income was the Philippines.
In synthesis, therefore, we hold that conditions have not been provided which justify
the court in passing on the constitutional question suggested; that the facts while
somewhat obscure differ from the facts to be found in the cases relied upon, and that
the Collector of Internal Revenue was justified in withholding income taxes on interest
on bonds and other indebtedness paid to non-resident corporations because this income
was received from sources within the Philippine Islands as authorized by the Income
Tax Law. For the foregoing reasons, the second assigned error will be overruled.
Before concluding, it is but fair to state that the writer's opinion on the first subject and
the first assigned error herein discussed is accurately set forth, but that his opinion on
the second subject and the second assigned error is not accurately reflected, because
on this last division his views coincide with those of the appellant. However, in the
interest of the prompt disposition of this case, the decision has been written up in
accordance with instructions received from the court.
Judgment affirmed, with the cost of this instance assessed against the appellant.
Hull, Vickers, Imperial, Butte, and Recto, JJ., concur.
Separate Opinions
VILLA-REAL, J., concurring and dissenting:
I concur with the majority decision regarding the disposition of the second error, but
dissent as to its disposition of the first error. In my opinion, the exemption clause to
be found in the charter of the plaintiff is broader in scope than that to be found in the
charter of the Philippine Telephone and Telegraph Company, thus making inapplicable
the decision of this court in the case of Philippine Telephone and Telegraph Co. vs.
Collector of Internal Revenue (58 Phil., 639).
ABAD SANTOS, J., concurring in part and dissenting in part:
I am of opinion that the first assignment of error should be sustained and the judgment
below reversed in that respect.
The franchise held by the appellant corporation contains a stipulation by the
Government to the effect that the payment by the corporation to the entities named in
the franchise of two and one-half per centum of its gross receipts, shall be in lieu of all
taxes, except taxes on the real estate, buildings, plant, machinery and other personal
property belonging to the corporation. The dividends paid by the appellant corporation
to its stockholders were a part of its earnings and as such not subject to tax under the
terms of the franchise. The franchise in this case is a contract, the obligation of which
can not be impaired.
I agree with the majority of the court that the second assignment of error should be
overruled, and the judgment affirmed in that particular.
Section 13 (e) of Act No. 2833, as amended by Act No. 3761, expressly provides for
the imposition of a tax "... upon the income derived from interest upon bonds and
mortgages, or deeds of trust, notes, or other interest-bearing obligations of a domestic
or resident foreign corporation, ..." The income derived from the interest on bonds and
other indebtedness of the appellant corporation, is clearly within the purview of the
statute. The power of the legislature to impose such a tax must be recognized. As stated
by Justice Bradley in United States vs. Erie R. Co. (106 U.S., 327; 27 Law. ed., 151,
153) : "... The tax laid upon their bonds was intended to affect the owners of the bonds,
and whilst the companies were directed to pay it, they were authorized to retain the
amount from the installments due to the bondholders, whether citizens or aliens. The
objection that Congress had no power to tax non-resident aliens, is met by the fact that
the tax was not assessed against them personally, but against the rem, the credit, the
debt due to them. Congress has the right to tax all property within the jurisdiction of
the United States, with certain exceptions not necessary to be noted. The money due
to non-resident bondholders in this case was in the United States in the hands of the
company before it could be transmitted to London, or other place where the
bondholders resided. Whilst here it was liable to taxation. Congress, by the internal
revenue law, by way of tax., stopped a part of the money before its transmission,
namely; 5 per cent of it. Plausible grounds for levying such a tax might be assigned. It
might be said that the creditor is protected by our laws in the enjoyment of the debt;
that the whole machinery of our courts and the physical power of the government are
placed at his disposal for its security and collection."
AVANCEÑA, C.J., dissenting:
I do not agree with the majority opinion with respect to the appellant's second
assignment of error, which in my opinion should be sustained. The question involved
in this error has been clearly decided by this court in the case of Manila Railroad Co.
vs. Collector of Internal Revenue (G.R. No. 31196, promulgated December 2, 1929,
not reported). In said case it was held that interest on bonds purchased outside the
Philippine Islands by non-residents of the Islands cannot be considered derived from
sources within the Islands. The amendment of the law introduced by Act no. 3761 as
to the place of payment of interest does not affect the aspect of the question raised in
this error if the interest on which the tax in the present case has been collected is not
derived from sources within the Islands, as it is not so in fact, in accordance with the
doctrine laid down in said case of Manila Railroad Co. vs. Collector of Internal
Revenue.
GODDARD, J., dissenting:
The tax exemption and commutation clause in the plaintiffs franchise provides that:
The grantee shall annually on the 5th day of January of each year pay to the City of
Manila and to the municipalities in the Province of Rizal in which gas is sold, two and
one half per centum of the gross receipts within said city and municipalities,
respectively, during the preceding year. Said payment shall be in lieu of all tax,
Insular, provincial and municipal, except taxes on the real estate, buildings, plant,
machinery, and other personal property belonging to the grantee.
This franchise is a contract between the Government and the grantees thereof, whose
rights have been acquired by the plaintiff corporation. In Manila Railroad Co. vs.
Rafferty (40 Phil., 224, 230), this court held that "... Once granted, a charter becomes
a private contract ...." Article 1091 of the Civil Code provides that "Obligations arising
from contract shall have the force of law between the contracting parties and must be
performed in accordance with their stipulations." It follows that as the plaintiff
corporation has paid to the City of Manila and to the municipalities of Rizal, where
gas is sold by it, the franchise tax stipulated in the contract, the Government has no
legal right to impose another tax on its earnings.
The case of Farrington vs. Tennessee (95 U.S., 679; 24 Law. ed., 558), is almost in
exact parallel with the case at bar. The facts of that case were as follows: The Union
and Planters' Bank of Memphis was duly organized under the charter granted by the
Legislature of Tennessee, by two Acts, respectively dated March 20, 1858, and
February 12, 1869. Since its organization it continued doing a regular banking
business. Its capital subscribed and paid in amounted to $675,000, divided into 6,750
shares of $100 each. Farrington, the plaintiff in error, was the owner of 150 shares, of
the value of $15,000.
The tenth section of the charter of the bank declared:
That said Company shall pay to the State an annual tax of one-half of one per
cent on each share of the capital stock subscribe, which shall be in lieu of all
other taxes.
The State of Tennessee and the County of Shelby, claiming the right under the
Revenue Law of the State, to tax the stock of the plaintiff in error, a stockholder of the
bank, assessed and taxed it for the year 1872. It was assessed at its per value. The tax
imposed by the State was forty cents on the $100, making the state tax $60. The county
tax was $1.20 on the $100, making the county tax $180.
The plaintiff in error denied the right of the State and County to impose these taxes.
He claimed;
(1) That the 10th section of the charter was a contract between the State and
the bank;
(2) That any other tax than that therein specified was expressly forbidden,
and.
(3) That the revenue laws imposing the taxes in question impaired the
obligation of the contract.
The Supreme Court of Tennessee adjudge the taxes to be valid and the plaintiff in error
thereupon removed the case to the Federal Supreme Court for review.
In upholding all of the contentions of the plaintiff in error, and pronouncing invalid
the taxes involved as impairing the obligation of the contract created by the franchise,
the United States Supreme court said:
This case turns upon the construction to be given to the 10th section of the
charter of the bank. . . .
xxx xxx xxx
When this charter was granted, the State might have been silent as to taxation.
In that case, the power would have been unfettered. (Bk. vs. Billings, 4 Pet.,
514.) It might have reserved the power as to some things, and yielded it as to
others. It had the power to make its own terms or to refuse the charter. It chose
to stipulate for a specified tax on the and declared and bound itself that this
tax should be "in lieu of all other taxes."
There is no question before us as to the tax imposed on the shares by the
charter. But the State has by her revenue imposed another and an additional
tax on these same shares. This is one of those "other taxes" which it had
stipulated to forego. The identity of the thing doubly taxed is not affected by
the fact that in one case the tax is to be paid vicariously by the bank, and in
the other by the owner of the share himself. The thing thus taxed is to the
same, and the second tax is expressly forbidden by the contract of the parties.
After the most careful consideration, we can come to no other conclusion.
Such, we think, must have been the understanding and intent of the parties
when the charter was granted and the bank was organized. Any other view
would ignore the covenant that the tax specified should be "in lieu of all other
taxes." It would blot those terms from the context, and construe it as if they
were not a part of it. . . .
xxx xxx xxx
The decree of the Supreme Court of Tennessee is reversed and the case will
be remanded, with directions to enter a decree in favor of the plaintiff in error.
(Farrington vs. Tennessee, 95 U.S., 679; 24 Law. ed., 560, 561.)
That case, it will be observed, is almost in exact parallel with the case at bar. Both
cases deal with tax commutation provided for in a franchise granted by the State. In
both cases the State covenanted that the tax specified in the franchise should be in lieu
of all other taxes. In both cases the additional tax which the tax authorities sought to
impose was a revenue tax. In both cases the tax provided for in the franchise was paid
by the corporation, and the tax which the authorities attempted to collect were imposed
on the stockholders. In the Farrington case the provision in the Federal Constitution
that "No State shall ... pass any ... law impairing the obligation of contracts" was
applied; in this case the provision of our Organic Law that "no law impairing the
obligation of contracts shall be enacted" is involved. It will be observed further, that
in the Farrington case the franchise was granted to a corporation, yet the court held
that the court mutation provision of the franchise extended to the individual
stockholders. In the case at bar, while the plaintiff the present owner of the franchise.
is a corporation, the original grantees were natural persons; hence there is more reason
for holding in the present case that the mutation provision in the franchise granted by
the Philippine Government should extend to the stockholders of plaintiff corporation.
The Farrington Case, decided in 1878, was by a divided court. Eighteen years — later
in 1896 — the State of Tennessee sought to have the decision in that case reviewed,
on the ground that the court did not consider the other portions of the charter which,
according to the State, were material. The Supreme Court — this time unanimously
— declined to reverse its view as expressed in the Farrington decision, saying.
We do not think under the circumstances that we ought now to come to a
different conclusion upon the question of exemption from that which was
arrived at by this court in the Farrington Case. As the whole charter was then
before the court, we are not prepared to say that its force was misunderstood,
or that there was an omission by the court to consider all the language of the
exemption clause simply because a portion of its omitted in the quotation
from the record made in the opinion therein delivered. We are not inclined,
therefore, to overrule or distinguish the Farrington Case, and we must now
told that the charter clause of exemption limits the amount of tax on each
share of stock in the hands of the shareholder, and that any subsequent
revenue law of the state which imposes an additional tax on such shares in
the hands or shareholders, impairs the obligation of the contract, and is void.
This compels us to reverse the judgments herein against the shareholders.
(Bank of Commerce vs. Tennessee, 16 U.S. 134; 40 Law. ed., 645, 648.)
The doctrine of the Farrington Case is now the settled rule of the highest court of the
United States. The first assignment of error should therefore be sustained.
As to the second assignment of error I concur with the dissenting opinion of the Chief
Justice for the reasons set forth therein. Consequently that assignment of error should
also be sustained.
The trial court erred in not holding that interest received by a non-resident corporation,
outside the Philippine Islands, is not income from Philippine sources and so not subject
to income tax.
In view of the above I am of the opinion that the appealed decision should be reversed
and another entered by this courts ordering the defendant to pay the plaintiff the sum
of P40,460.03, the amount of withholding taxes paid on account of interest on bonds
and other indebtedness, or a total of P56,757.37.